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Pros and Cons of a Debt Consolidation Loan
godmode
Southeast JapanRegistered User regular
Southeast JapanRegistered User regular
I, like so many other human beings, am in debt. I currently owe on a car and credit card, totaling close to $20,000 US, both to the same bank. Earlier when logging into my account online, I noticed the bank sent me a message suggesting a debt consolidation loan, and my first thought was "Boy, that'd be nice." But there's gotta be a catch, right?
My current interest rates are about 8.5% (auto) and 16.9% (credit card). The advertised interest on the loan is ~11%, though of course there's the chance I get a slightly higher one, I don't suppose I'd know for sure without applying.
So should I bother? It would be nice to pay only one bill per month instead of the two, but would I even be saving much by bumping down my credit card interest rate while slightly raising my auto rate, as they stand now? And is there anything else I should know about consolidation loans that isn't immediately apparent? Anyone have personal experience with consolidation loans that could lend some perspective?
My current interest rates are about 8.5% (auto) and 16.9% (credit card). The advertised interest on the loan is ~11%, though of course there's the chance I get a slightly higher one, I don't suppose I'd know for sure without applying.
So should I bother? It would be nice to pay only one bill per month instead of the two, but would I even be saving much by bumping down my credit card interest rate while slightly raising my auto rate, as they stand now? And is there anything else I should know about consolidation loans that isn't immediately apparent? Anyone have personal experience with consolidation loans that could lend some perspective?
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I wouldn't fold your car payment into this, if you decide to go that route though. making 2 payments as opposed to one doesn't really hurt you. unless you were planning on lowering your payment? i wouldn't do that, as it will take longer to pay everything off.
Yep, that's right.
French: I would be doing it only to make payments easier to keep track of and lower my overall interest rate. If I were to go that route, I was actually planning in paying more towards my debt every month. See, right now I pay 288/mo on the car and about 200/mo on the CC. With the loan, I was planning on a flat 600/mo payment, again, just for ease.
As for my credit rating, it's not too bad. I think around mid-600. I don't think getting another credit card would do anything for me, though. I'm just trying to make it easier to pay off what I have already.
While I believe collateral may be required (probably the car title, which they still have anyway), I have a very steady job in network administration that pays quite well, so I don't see myself going unemployed and missing any payments.
Also how many years did they give you for the 11% loan, 5?
If you only owe another year or two on the car, it's better to just pay them both off like they are now, focusing on putting as much as you can into one or the other until it's paid off early.
If you roll them into one, it's basically like you're taking your 11K loan at 8 percent and refinancing it so now you're paying for a 20K car at 11 percent for another five years, which is longer payments and more interest, when you can just have it all paid off in a couple years at the rate you're going now.
That's why they want you to refinance and consolidate. It looks good on paper, but in the long run they've got you paying more interest and over a longer period of time, so unless you come into some money you're stuck making payments longer.
From my math, which is probably wrong and someone will correct me, you're not really saving anything by consolidating to 11%
If you were already planning to pay more, then do that now, if both loans are from the same bank it's not like it's hard to keep track of them. Start paying each one of them at $300 a month and they'll both be gone quicker.
Look for fees for transferring the debt. This is not necessarily a deal breaker, but you will need to factor it in.
Is there any penalties for early payment on the new loan?
Once you consolidate the loans, don't lower your payments.
The Auto loan is a fixed duration loan, so how long is left on that? If its not long then extending the term is not a great idea unless your drowning.
The CC loan is not a fixed duration loan, so locking that into a fixed duration at a fixed rate is not a bad idea at a lower interest rate.
You will need to stop using the CC outside of emergencies. If you are using the CC to pay some of your normal bills then this is a bad idea, and in fact you have all kinds of worse problems.
www.bankrate.com has some swell calculators that will help you with the math.
But that's not a great rate. not terrible, but not great. shop around and see if you can do better. Good luck!
A consolidation loan, generally speaking, is judt a loan; it won't hurt your credit or anything. If it involves negotiating down the amount of the debt, then it's a 'consumer proposal', which is nearly as bad as bankruptcy in your credit report. That's a last resort.
Generally, as said above, just do the math. If it's cheaper with the new loan - and it often is when credit cards are involved - then take it. You'll likely lose access to your revolving debt, which can be good or bad depending on your viewpoint. Shop around, though, and see if anyone else will do it for less.
The math:
Car=$11,000 @ 8.5% paying $288/month = 45 months, $12880
CC=$9,000 @ 16.9% paying $200/month = 72 months (6 years), $14,400
Car=$11,000 @ 8.5% paying $288/month = 45 months, $12880
CC=$9,000 @ 16.9% paying $312/month = 37 months, $11554
Consolidated loan = $20,000 @ 11% paying $600/month = 40 months, $24,000
So, the consolidated loan saves you about $300-$350, assuming $288 is the minimum on your car loan, and you started applying your CC payments to your car when you were done paying down the CC. However, if you could rustle up another $100 a month...
Car=$11,000 @ 8.5% paying $288/month = 45 months, $12880
CC=$9,000 @ 16.9% paying $412/month = 26 months, $10712
Consolidated loan = $20,000 @ 11% paying $700/month = 34 months, $23,800
With another $100 a month, you could have both of those paid off in less than three years, easily (kick the credit card payments into the car loan once you're done with the CC). Do the unconsolidated loan and carry gap insurance, so if something happens to your car, you're not stuck with the excess loan. That extra $100 a month will get you out of debt about 8 months earlier, and you'll end up paying probably a thousand or two less than you would without it.
Basically, the faster you pay off the credit card, the less advantageous the consolidation loan is. Additionally, with gap coverage, if something happens to your car while you're making minimum payments, the loan goes away. With the consolidated loan, if something happens to your car while you're paying down the loan, you're stuck with the remaining principal.
If you can afford to live sparsely for awhile, pay down that credit card bill as fast as humanly possible, then deal with the car after. The faster you pay down that credit card, the less it's going to cost you, and the better off you're going to be in the long run.
Your credit card has a 30-day grace period before interest kicks in. So, say you have a $200 bill. Paying it with your bank card costs you $200, but that's $200 that you can't put towards your credit card payment. So, the $200 you would have paid down gets you about $1.25 in interest. So, paying that $200 bill with your bank account costs you $201.25.
If you use your credit card to pay the bill, then pay the $200 you would have spent from your bank account on paying down your credit card, then the 30-day grace period kicks in. Your $200 credit card payment goes towards debt that would otherwise accrue interest, and the $200 you spent on the bill has a thirty-day grace period. So, paying with the credit card costs you $200. Also, you accrue points and rewards on your credit card for using it.
Obviously, you shouldn't be spending more than you're getting paid, but don't stop using the credit card; in fact, start using it for anything you'd otherwise use your bank card for, then pay it down immediately.
What I meant was that if he is paying his cable bill, for example, each month with is CC because he can't afford to pay for it any other way. Then he is in trouble as he is building debt that is not being paid off.
Clearly, using the CC responsibly to pay for stuff and then paying the bill at the end of the month is fine. So long as your are paying off more then you are accruing.
I believe they got my cards down to 6%, but naturally they closed out the cards, so I took a bit of a credit hit initially.
Just an idea. If things aren't dire and you're able to make your payments, I wouldn't do it.
Origin: KafkaAU B-Net: Kafka#1778
I meant see if they have a card with a better rate, and transfer the CC balance to that, then put the high rate one away and don't use it anymore (unless it's a reward card or something, then you can use it and make sure to pay it off every month). The only reason to keep it is for your credit history, honestly.
There's no reason to take an interest bump in your car payment, just to only make one payment a month. Sounds like you've got a plan though. so carry on!
Because, that would make that 11% not so incredible if you think about it
we also talk about other random shit and clown upon each other